Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell including a look at next week's official interest rate reviews from both the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA).

Financial markets are expecting the RBA to cut Australia's Cash Rate by 25 basis points to 35 on Tuesday afternoon.

"Market pricing at the moment is about an 80% chance of that (25 basis points cut) happening, although some economists have come out in the last few days and talked up a potential 50 basis points rate cut," Bell says.

"The RBA doesn't actually make another (interest rate) announcement until February next year so there's a little bit of time between this announcement and the next. And as we've heard from the RBA recently, they really want to try and give the rest of Australia's economy, outside of mining and resources, a bit of a break," Bell adds.

"And to do that they need to bring the Australian dollar down. So I think they're going to cut next week. I think they're going to cut again and that would have the cash rate in Australia getting closer to ours, which is currently at 2.5%."

RBNZ Governor expected to try and talk NZ dollar down

Then next Thursday morning the RBNZ will announce the result of its latest Official Cash Rate (OCR) review. No change from 2.5% is expected from Governor Graeme Wheeler, although Bell notes the market is pricing in a potential rate cut over the next three or four months.

"I don't see it (a cut) happening and most of the economists don't see it happening," Bell says.

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"The RBNZ again have got a tricky job ahead of them. The RBA is easing, most other global reserve banks have their rates set at very, very low levels, much lower than ours, and a higher currency is certainly not what we need right now with what is continuing to be quite a sluggish (economic) recovery."

"So I think he (Wheeler) will try and talk the currency down next week," adds Bell. "But at the end of the day talk is cheap and I think to really bring it (the NZ dollar) down we'll need to see a rate cut or a turn in offshore sentiment, and risk aversion would obviously bring the New Zealand dollar down, although risk sentiment seems to be holding up quite well at the moment."

With many other developed countries facing sovereign debt problems and recessions, and both the Australian and New Zealand economies still growing, demand for the two country's bonds and currencies continues to be strong. The Australian Financial Review reported today that Russia's central bank is increasing its Australian-dollar purchases by at least A$20 billion and could be seeking to allocate up to 10% of its reserves, making it harder for the RBA to weaken the Australian dollar.

"Private capital expenditure numbers released this week flag that it looks like we're going to see zero percent, zero growth in business investment next year. Earlier this year some analysts had flagged that resources and mining investment was going to peak this year. So next year that could have a bit of a drag on growth in Australia," Bell says.

"It's clearly another reason why I think the RBA wants to try and loosen up monetary policy and hopefully bring the Aussie dollar down."

He expects 2013 to be an interesting year for the Aussie dollar.

"In fact one of the most watched forecasters (at investment bank Goldman Sachs) this week is forecasting the Aussie dollar under parity next year, in fact going as low as US95 cents. Currently it's at about US$1.04 which is still very, very high by any historical standards. It's also still reasonably strong against the New Zealand dollar (the NZ dollar's at about A78.8 cents), although it is losing a bit of ground at the moment."

Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.

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1 Comments

What on earth can Wheeler say to talk the NZD down, given he's already (very rashly in my view) painted himself into every aspect of an ultra orthodox, inflation only, OCR tool only corner?
"Please would you mind not sending so much of your dodgy currency manipulating capital our way" may not deter said capital.
Nor is dropping the OCR likely to help the currency down on its own all that much; although I would have thought the continual stream of dreadful, and apparently surprising to some, statistics might well have him think about doing that. (Even though given a housing bubble, and capital chasing assets here as much as interest bearing returns, means dropping the OCR would likely only further deter saving by NZers- the wrong result) Is he willing to realise that another bag of tricks is available and necessary given the activities of other central banks, including now our Aussie mates? If this article is correct, the RBA is very much focussed on its exchange rate, and not on inflation; and is using multiple tools including printing to try and do something about it.